<p>
  In different kinds of asset pricing model like bond pricing, <span class="s1">enterprise valuation, </span>the most commonly used valuation method is to calculate the present value of the expected cash flows of that asset. But options have some characteristics that are different from the common asset. For example, the options value depends on its underlying asset. In addition, the cash flow on options are not constant over periods but depends on the occurrence of specific events which are not predictable. In fact, the value of the option is determined by lots of variables.
</p>
<ul>
     <li><strong>the underlying price:</strong> Change in the value of the underlying asset is the most important factor which affects the options price. For the call option, holders can earn profit from the price rising and put option holders earn profits from the price decline. Therefore, call options become more valuable as the underlying prices increase while the put options will become less valuable.</li>
     <li><strong>The volatility of the underlying asset:</strong> Volatility is a measure of the degree of fluctuation of the underlying stock price. It is a forward volatility, which means it is a prediction of how much the stock price of the underlying will move in the future over a certain period of time. The higher the predicted volatility is, the higher the probability that the underlying price will move a lot. Thus the greater will the value of the option is both for calls and puts. We will further discuss different types of volatilities in the subsequent tutorials.</li>
     <li><strong>The strike price of the option:</strong> Call options gain profit when stock prices greater than the strike, it is easy to understand that the higher the strike price is for the call option, the fewer profits the holder can get, the less valuable of the call option. Thus for the put options, options with higher strike price are more valuable.</li>
     <li><strong>Time to expiration: </strong>If the current date is t, the expiration date of the option contract is T. Then the time to expiration is T-t. For v=both call and put options, the longer time to expiration means there are more changes for the function of stocks prices, and higher probability for the option holders to gain profits from price movement.</li>
     <li><strong><strong>The risk-free interest rate: </strong></strong>As interest rates increase, the expected return required by investors from the stock tends to increase. On the other hand, the present value of discounted cash flow will decrease. Thus the increase in interest rate will increase the call option price and will decrease the put option price.</li>
     <li><strong>The dividend yield: </strong>After the dividends paid, the share price of the stock will decrease. During the options holding period, the decline in underlying price is unfavorable for call options holder. Therefore, the increase in dividend yield will decrease the price of call options and increase the price of put options.</li>
</ul>
